At last, all Australians can invest like a Reserve Bank Governor – and it turns out that it is very simple and straightforward.
Given that RBA Governor Dr Philip Lowe arguably has the best view of what is happening in the Australian economy at any time, the release of his personal investments in a declaration of material financial interests shows he is a big fan of a passive investment strategy.
Instead of picking and choosing a variety of individual shares – with the one exception an investment in Telstra – Dr Lowe gets broad exposure to the share market through exchange traded funds (ETFs) and also managed funds from Vanguard and Colonial First State.
ETFs preferred to individual shares
It is obviously also a very good idea for a central banker not to have too many direct shareholdings because it takes away any inference of them being able to benefit certain industries through monetary policies.
Dr Lowe is obviously a savvy banker, with his bank account and credit card with Commonwealth Bank backed up with accounts with UBank and ING – both well known for having some of the highest deposit rates available.
And his super is with SunSuper – an industry fund that manages $85 billion and is known for its low fees and strong performance.
While the exact spread of Dr Lowe’s investments is not detailed, we can very clearly get an idea of his investment strategy, which is very much in line with an economist who believes in the efficient market hypothesis.
In simple terms, that hypothesis holds that information is quickly absorbed into share prices, which makes it fairly futile to try to pick winners and losers using your own judgement.
Active fund managers, by definition, believe they can beat the averages by picking undervalued shares but the longer term numbers don’t really support that view – particularly after fees are taken into account.
Diversification improves returns and lowers volatility
Firstly, Dr Lowe’s approach is to use diversification to improve returns and reduce volatility.
ETFs and managed funds are perfect vehicles for getting diversification because they are usually spread across a wide range of shares that make up an index.
To give an example – and I stress this is not Dr Lowe’s actual investment plan, which we don’t know in detail – you could cover most of the world’s major equities markets with just three shares.
That provides diversification across industries, countries, currencies and gives meaningful exposure to all of the world’s major companies in just three trades.
To try to replicate that level of diversification by buying individual stocks yourself would be very difficult and expensive but fortunately you don’t have to.
Of course, the other advantage of this approach is that asset allocation remains in the hands of the investor, who gets to decide what proportion of their funds is invested in which markets.
Add in some exposure to small caps and emerging markets and you have a fairly comprehensive approach to equities investment in just a few stocks that can be rebalanced easily and quickly.
If you want a really simple set and forget approach and find an asset allocation that suits your risk profile, you can even choose a single pre-mixed fund such as Vanguard’s diversified high growth (ASX: VDHG), Diversified growth (ASX: VDGR), Diversified conservative (ASX: VDCO) or Diversified balanced (ASX: VDBA).
Keeping fees low is vital
The second string to Dr Lowe’s approach is that he keeps fees low.
By using ETFs and a low fee superannuation provider, he is ensuring most of his money is actually invested, rather than being milked off to provide deep carpets, long lunches and fancy offices to investment banks and fund managers.
Keep investments simple and easy to understand
The third string to his investment approach is that it is remarkably simple and easy to understand.
A lot of the mystique around investment markets is actually smoke and mirrors created by people trying to sell you something, be it a complex algorithm or a web of trusts and inter-related companies.
By keeping investments simple and easy to understand instead of complex and opaque, they become much simpler to manage.
One of the more interesting things about Dr Lowe’s investments is that he does not hold any bonds, although that could be because he wants to avoid any conflict of interest given his pivotal role in setting interest rates.
Government bonds have been in a strong bull market for many years as interest rates kept falling across the world, delivering capital gains to those who held bonds with a higher coupon or interest rate.
With Australia’s official cash rate at a record low of 0.1%, it seems likely that holding government bonds with such tiny yields has become somewhat futile other than as a way of balancing out equity exposures to add security.